In addition to direct effects that are quickly visible, people’s decisions often generate indirect, or “secondary,” effects that may be observable only with time. Failure to consider secondary effects is one of the most common economic errors because these effects are often quite different from initial, or direct, effects. Frederic Bastiat, a nineteenth-century French economist, stated that the difference between a good and a bad economist is that the bad economist considers only the immediate, visible effects.
The true cause of these secondary effects might not be seen, even later, except by those using the logic of good economics.
Perhaps a few simple examples that involve both immediate (direct) and secondary (indirect) effects will help illustrate the point. The immediate effect of an aspirin is a bitter taste in one’s mouth. The secondary effect, which is not immediately observable, is relief from a headache. The short-term direct effect of drinking twelve cans of beer might be a warm, jolly feeling. In contrast, the secondary effect is likely to be a sluggish feeling the next morning, and perhaps a pounding headache.
Sometimes, as in the case of the aspirin, the secondary effect-headache relief-is actually an intended consequence of the action. In other cases, however, the secondary effects are unintended. Changes in government policy often alter incentives, indirectly affecting how much people work, earn, invest, consume, and conserve for the future. When a change alters incentives, unintended consequences that are quite different from the intended consequences may occur.
Let’s consider a couple of examples that illustrate the potential importance of unin- tended side effects. In an effort to reduce gasoline consumption, the federal government mandates that automobiles be more fuel efficient. Is this regulation a sound policy? It may be, but when evaluating the policy’s overall impact, one should not overlook its secondary effects. To achieve the higher fuel efficiency, auto manufacturers will reduce the size and weight of vehicles. As a result, there will be more highway deaths-about 2,000 more per year-than would otherwise occur because these lighter cars do not offer as much protec- tion for occupants. Furthermore, because the higher mileage standards for cars and light trucks make driving cheaper, people tend to drive more than they otherwise would. Thi increases congestion and results in a smaller reduction in gasoline consumption than was intended by the regulation. Once you consider the secondary effects, the fuel efficiency regulations are much less beneficial than they might first appear.
Trade restrictions between nations have important secondary effects as well. The proponents of tariffs and quotas on foreign goods almost always ignore the secondary effects of their policies. Import quotas restricting the sale of foreign-produced sugar in the U.S. market, for example, have led to sugar prices that are about three times what they are in the rest of the world. The proponents of this policy-primarily sugar producers-argue that the quotas “save jobs” and increase employment. No doubt, the employment of sugar growers in the United States is higher than it otherwise would be. But what about the secondary effects? The higher sugar prices mean it’s more expensive for U.S. firms to produce candy and other products that use a lot of sugar. As a result, many candy producers, including the makers of Life Savers, Jaw Breakers, Red Hots, and Fannie May and Fanny Farmer chocolates, have moved to countries like Canada and Mexico, where sugar can be purchased at its true market price. Thus, employment among sugar-using firms in the United States is reduced. Further, because foreigners sell less sugar in the United States, they have less purchasing power with which to buy products we export to them. This, too, reduces U.S. employment. Once the secondary effects of trade restrictions like the sugar quota program are taken into consideration, we have no reason to expect that U.S. employment will increase as a result. There may be more jobs in favored industries, but there will be less employment in others. Trade restrictions reshuffle employment rather than increase it. But those who unwittingly fail to consider the secondary effects will miss this point. Clearly, consideration of the secondary effects is an important ingredient of the economic way of thinking.